Core viewpoints
On October 26, the company released the third quarter report of 2023, saying that in the first three quarters of 2023, the operating income was 114.364 billion yuan, an increase of 11.09% over the same period last year, and the net profit was 1.824 billion yuan, an increase of 4.89% over the same period last year. The net profit after deduction was 1.728 billion yuan, an increase of 14.01% over the same period last year, and the basic earnings per share was 0.65 yuan. Looking forward to 23Q4, the company will continue to optimize the business structure, general generation brand promotion of high gross profit business income may be steady growth, superimposed resident drug demand gradually released, the company's profitability is expected to improve steadily.
Event
The company released the third quarter report of 2023, and the results were in line with our expectations on October 26, and the company released the third quarter report of 2023. In the first three quarters of 2023, the company's operating income, net profit and net profit after deducting non-return were 114.364 billion yuan, 1.824 billion yuan and 1.728 billion yuan respectively, an increase of 11.09%, 4.89% and 14.01% respectively over the same period last year.
Brief comment
Continued improvement in profitability and steady growth in core business
In the first three quarters of 2023, the revenue side of the company increased by 11.09%, mainly due to: 1) the order of in-hospital diagnosis and treatment was gradually restored in the first half of the year. Residents' drug demand continued to release; 2) the drug demand of primary health care institutions increased steadily; 3) the demand for brand promotion of pharmaceutical companies was strong, and the total brand promotion business income of the company increased by 25.9% to 11.965 billion yuan in the first three quarters compared with the same period last year. 4) the business revenue of retail e-commerce platform increased by 52.77% to 4.532 billion yuan.
In the first three quarters of 2023, the company's return net profit increased by 4.89% compared with the same period last year, and the non-return net profit increased by 14.01% compared with the same period last year. The difference in profit growth is mainly due to the non-recurrent profit and loss of about 145 million yuan formed by the company's disposal of non-current assets in the same period last year, compared with a loss of 22.39 million yuan in the current period.
In the third quarter of 2023, the company's operating income increased by 0.13% to 35.007 billion yuan compared with the same period last year, mainly due to: 1) the hospital end income was temporarily under pressure due to the influence of in-hospital compliance sales, and it is expected that Q4 operation will improve month-on-month; 2) the consumption power of residents is relatively weak; the operating pressure of out-of-hospital drugstores is greater; 3) the growth of general agent sales business slows down due to the seasonal influence of products. The company's net profit increased by 2.34% to 481 million yuan compared with the same period last year, and the non-return net profit increased by 5.70% to 432 million yuan compared with the same period last year. The difference in the growth rate at the profit end is mainly due to differences in the disposal of non-current assets, and the growth at the profit end is faster than that at the income end, mainly due to the continuous optimization of the company's income structure. The proportion of revenue from the general generation brand promotion business, pharmaceutical industry and OEM business with higher gross profit margin has increased.
The distribution business is under temporary pressure, and the online distribution performance is excellent.
In the first three quarters of 2023, the order of diagnosis and treatment in the hospital fluctuated greatly, especially due to the influence of hospital compliance sales in the third quarter, the company's in-hospital business was temporarily under pressure, while the contribution of the outside end of the hospital was limited due to the influence of residents' spending power, but the company actively promoted the development of online business and actively implemented digital transformation. In the first three quarters of 2023, the company accelerated the empowerment of terminal customers such as pharmacies and clinics, and the revenue scale of digital distribution business such as the pharmaceutical 999 B2B trading platform reached 8.493 billion yuan. at the same time, the company gave full play to its logistics advantages and docked with the e-commerce platform system. the sales revenue to large-scale pharmaceutical retail e-commerce platforms such as JD.com and BABA reached 4.532 billion yuan, an increase of 52.77% over the same period last year. We believe that the impact of compliance sales in the hospital may stabilize in the fourth quarter, household consumption is expected to be released, and the company's distribution business may be improved. In addition, through digital empowerment, the company's distribution business is expected to meet more diverse customer needs. Work with offline business to help transform traditional distribution business.
The general generation brand promotion business grew steadily, and the industrial sector performed well in the first three quarters of 2023. In the first three quarters of 2023, the company's general generation brand promotion business had a total of 1312 agency rules, business revenue increased by 25.90% year-on-year to 11.965 billion yuan, and gross profit margin increased by 1.74% to 15.79%. In the first three quarters of 2023, the company's drug general brand promotion business achieved sales revenue of 6.478 billion yuan, an increase of 32.35% over the same period last year, and equipment general brand promotion business achieved sales revenue of 5.486 billion yuan, an increase of 19.05% over the same period last year. In the first half of 2023, the sales volume of the company's Kewei, Kangwang and Premium series of key varieties increased significantly, leading to a substantial increase in terminal sales revenue and gross profit. At the same time, the company actively distributes industrial production and OEM business, with revenue of 1.766 billion yuan and gross profit margin of 23.38% in the first three quarters, continuously optimizing the overall profit structure. We believe that by accelerating the development of high-margin core business, the company's overall profitability is expected to continue to be optimized, and the performance potential may be gradually released.
Innovative business continues to make efforts to accelerate terminal stickiness
In the first three quarters of 2023, the company actively promoted the "ten thousand stores" business of pharmacists. By the end of September 2023, the company had a total of 17272 self-operated and franchised stores, and it is expected that the number of stores will exceed 30,000 in 2025. At the same time, the company accelerated the development of the "Power Drug Cloud" platform and focused eye specialist business operation. the platform has a total of 5039 ophthalmologists and more than 26000 paying patients. by the end of September, the cumulative sales were 12.26 million yuan, an increase of 145% over the same period last year.
We believe that by accelerating the development of innovative business, the company can effectively improve the stickiness of end customers and establish the potential for performance growth.
Q4 operation is expected to improve month-on-month, and the Reits project may contribute to the fourth quarter. We believe that the impact of compliance sales in the hospital may stabilize. With the gradual landing of the overall outpatient policy, while the reimbursement proportion of grass-roots medical institutions and pharmacies is relatively large, the demand for drug use in the grass-roots and out-of-hospital market is expected to accelerate the release, which will bring additional increments for the company's performance. At the same time, the company actively promotes innovation transformation, and the proportion of innovative business revenue with high gross margin is expected to further increase, thereby reducing the impact of the decline in gross profit margin in the traditional distribution sector and further optimizing the overall profitability of the company. In addition, due to the external environment and changes in the fair value of the financial assets held by the company, the company's net interest rate has fluctuated greatly in the past three years. With the continuous expansion of the company size and the gradual landing of the Reits project, the company's overall net interest rate may rise steadily.
Structural adjustment increased comprehensive gross profit margin, net cash flow of operating activities improved significantly in the first three quarters of 2023, the company's comprehensive gross profit margin was 8.12%, an increase of 0.32% over the same period last year, mainly due to the increase in the proportion of high gross profit business income; the rate of sales expenses was 2.88%, an increase of 0.09 percentage points over the same period last year, which remained basically stable; the rate of management expenses was 1.81%, an increase of 0.08 percentage points over the same period last year, which remained basically stable The rate of financial expenses was 0.81%, down 0.01 percentage points from the same period last year, and remained basically stable. The net cash flow generated by operating activities increased by 154.30% compared with the same period last year, mainly due to increased collection efforts and increased sales rebates. Inventory turnover days was 41.77 days, a year-on-year decrease of 0.79 days, basically stable; accounts receivable turnover days was 75.35 days, a decrease of 9.25 days compared with the same period last year, mainly due to the company's increased collection of accounts receivable; accounts payable turnover days was 42.83 days, an increase of 1.16 days over the same period last year, basically stable. Other financial indicators are basically normal.
Profit Forecast and Investment rating
It is estimated that the company's operating income in 2023 will be 157.238 billion yuan, 176.678 billion yuan and 199.335 billion yuan respectively, up 12.0%, 12.4% and 12.8% respectively over the same period last year, and the net profit will be 2.606 billion yuan, 3.062 billion yuan and 3.580 billion yuan respectively, up 25.0%, 17.5% and 16.9% respectively over the same period last year, and EPS is 0.67 yuan per share, 0.78 yuan per share and 0.92 yuan per share respectively. Maintain a "buy" rating corresponding to valuations of 11.2x, 9.5x and 8.1x, respectively.
Risk analysis.
1) Drug collection risk: the scope of centralized drug procurement is gradually expanding, which may cause a certain price reduction risk to the company and affect part of the company's business income, and with the increase of bid-winning varieties with volume procurement, its excessive scale may have a great impact on the company's operating income and profits. 2) intensified market competition: the main competitors or newcomers in the market may weaken the company's comparative advantage and sustainable development ability, and then affect the company's long-term development.
3) product research and development risk: if the company's product research and development progress is not as expected, it may damage the company's long-term business competitiveness; 4) accounts receivable turnover risk: if the company's accounts receivable cycle is extended or cannot be recovered, it may bring time and economic losses to the company. 5) Regulatory risk: on March 2, 2023, the Shanghai Stock Exchange accepted an application from Kyushu to issue preferred shares to a specific target. In the follow-up inquiry process, the company said that the part of the healthy City project that the government allowed to sell, in addition to the part that has been sold to internal employees to provide employee benefits, it is not sold to the public, but it is actually sold to the public. Being supervised and warned by the Shanghai Stock Exchange may adversely affect the operation of the company.
6) Policy risk: the pharmaceutical industry is a highly regulated industry, and if there are more stringent policies, it may adversely affect the operation of the company.